Good Debt and Bad Debt Differences: What You Should Know

People who have some type of credit will have some type of debt.  These debts come in various forms, such as credit card balances, student loans, auto loans, mortgage loans, etc. However, there is a difference between good debt and bad debt.

Good Debt Can Keep Your Credit Healthy

When you have good debt, it can help keep your credit score up and your finances healthy.  On-time mortgage payments or student loans are examples of good debt.  These types of debt are payments for things that will go up in value. When you pay your mortgage on time, you are helping your home to increase in value.  A student loan can show that you are building your skills and that you are employed.  These are ways in which you can prove to creditors and other financial institutions that you are a good candidate for future credit because you are building a strong financial foundation.

Bad Debt May Damage Your Credibility for Future Loans

If you use a credit card to pay for everyday items such as groceries or utilities, you may be accumulating bad debt.  These are the types of debt that will not go up in value and, therefore, are not creating a strong financial history. They are not investments.  Other examples of bad debt are using credit cards to pay for vacations or other expenses that will not grow in value.  It is important to pay these types of debt off each month to help keep your credit score up.

By investing in good debt, you are creating valuable accounts that can prove you are financially responsible.  Bad debt may send you down a path towards unmanageable finances if you are not careful of your spending habits.  If your investments are growing in value, they are also contributing you with a strong and healthy financial future.